Verizon (VZ) Misses Earnings and Revenue Estimate in Q1

Verizon Communications Inc. VZ reported disappointing financial numbers in the first quarter of 2017 wherein both the top and bottom lines lagged the Zacks Consensus Estimate.

Quarterly GAAP net income was $3,553 million or 85 cents per share compared with $4,430 million or $1.06 per share in the year-ago quarter. Adjusted earnings per share came in at 95 cents in the reported quarter, below the Zacks Consensus Estimate of 98 cents.

Quarterly total revenue decreased 7.3% year over year to $29,814 million, missing the Zacks Consensus Estimate of $30,504 million.

Total operating expenses in the first quarter of 2017 were $22,633 million, down 6.6% year over year. Operating income came in at $7,181 million compared with $7,942 million in the year-ago quarter. Adjusted EBITDA was $11,114 million compared with $12,010 million in the prior-year quarter.

Cash Flow & Liquidity

In the first quarter of 2017, Verizon generated $1,681 million of cash from operating activities compared with $7,497 in the year-ago quarter. Free cash flow in the reported quarter was a negative $1,386 million compared with a positive $4,110 million in the prior-year quarter. At the end of the first quarter of 2017, Verizon had $4,307 million in cash and $116,546 million in long-term debts compared with $2,880 million and $108,078 million, respectively, at the end of 2016. The debt-to-capitalization ratio was 0.82 at the end of the first quarter of 2017 compared with 0.81 at the end of 2016.

Wireless Segment

Total revenue was $20,878 million, down 5.1% year over year. Service revenues dropped 6.1% to $15,778 million. Equipment revenues decreased 4.8% to $3,764 million. Other revenues totaled $1,336 million, up 7.7%.

At the end of the first quarter of 2017, Verizon had 113.913 million retail subscribers, up 1.2% year over year. Of the total, retail postpaid subscriber count was 108.483 million, up 1.2%; and retail prepaid user count was 5.430 million, down 0.5%. During the reported quarter, the company lost 0.307 million postpaid customers (compared with a gain of 0.640 customers in the prior-year quarter) while prepaid customer count decreased by 0.017 million.

Quarterly retail postpaid churn rate was 1.15% compared with 0.96% in the year-ago quarter whereas total retail churn rate was 1.39% as against 1.23% in the year-ago quarter. Of the total activated phones, smartphones accounted for 94.5% compared with 92.5% in the prior-year quarter. Retail postpaid ARPA (average revenue per account) was $136.98 compared with $145.34 in the year-ago quarter.

Wireline Segment

Total revenue at the segment was $7,876 million, down 0.6% year over year. Consumer retail revenues were up 0.7% to $3,201 million. Enterprise Solutions revenues contracted 1.4% to $2,466 million. Partner Solutions revenues dropped 2.8% to $1,256 million. Business Markets revenues grossed $890 million, up 2.3%. Other revenues decreased 21.3% to $63 million.

Operating expenses decreased 5.1% to $7,583 million. Quarterly operating income was $293 million compared with an operating loss of $67 million in the year-ago quarter. Quarterly operating margin came in at 3.7% compared with an operating loss of 0.8% in the year-ago quarter. Segment EBITDA was up 18.3% to $1,785 million. EBITDA margin was 22.7% compared with 19.0% in the year-ago quarter.

High-speed Internet connection tally dropped 16.7% year over year to 1.323 million while total broadband connection number was pegged at 7.011 million, down 1.2%. Primary residence switched access connections decreased 15% to 3.095 million and Primary residence connections fell 7.6% to 6.982 million. Total retail residence voice connections declined 8% to 7.200 million and total voice connections contracted 7.8% to 13.634 million.

Outlook for 2017

Management has estimated 2017 revenues and earnings per share to be mostly in line with 2016. Consolidated capital spending for 2017 will be in the range of $16.8 billion to $17.5 billion.

The company is facing intense competitive pressure from rivals like AT&T Inc. T, T-Mobile US Inc. TMUS and Sprint Corp. S. In order to counter this, the company has been focusing on generating revenues from video streaming services and digital advertising. Keeping with this strategy, it acquired AOL and Millennium Media.

In a bid to strengthen its presence in this space, Verizon has entered into an agreement to acquire Yahoo! Inc.’s YHOO core assets for $4.5 billion. If the company can effectively assimilate the strategic assets with that of AOL and Millennium Media, we believe it will gain an edge in the digital mobile content and advertising platform.

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